The impact of policy changes, elevated uncertainty and a weakening economic outlook started to show up in CRE fundamentals during the second quarter, with the shift in space demand most apparent for retail and industrial properties.
Total retail space absorption ran negative for the first two quarters of 2025, falling by an average of 7.3 million square feet, after averaging positive absorption of 11 million square feet in 2023 and 5.5 million square feet in 2024, according to Marcus & Millichap chief intelligence and analytics officer John Chang. That loss of momentum appears to be spreading across many of the 43 major markets analyzed by Marcus & Millichap, with 34 retail markets showing negative absorption during the second quarter, up from 27 during the first quarter and just 11 in the fourth quarter of 2024.
“The space demand reduction wasn’t severe,” noted Chang. “Most of the losses were minimal, but I think the spreading weakness in space demand reflects falling CEO confidence and increased retailer caution.”
Markets with positive retail space absorption during the second quarter included Phoenix, Dallas and St. Louis. Chang said retail space demand will likely remain choppy going forward, with the outlook hinging on the outcome of tariffs and economic growth.
Industrial absorption also tapered and turned negative by about 21 million square feet during the second quarter. That reverses positive net absorption of 20.8 million square feet in the first quarter, 22 million square feet in 2024, and 41 million square feet in 2023. Thirty-five metros had negative industrial absorption during the second quarter, up sharply from 16 markets during the first quarter, according to Marcus & Millichap’s data.
“A couple of markets – Baltimore and Denver – both had a sizable shift in demand that pushed vacancy up substantively,” said Chang. “That said, 13 major metros had positive space demand in the second quarter, led by Dallas, Phoenix, and Houston.”
Elsewhere in CRE, office demand gained momentum during the second quarter, with positive net absorption averaging about 18 million square feet per quarter for the past five quarters. During the first three months of 2024, 27 metros posted negative net absorption of office, which drove the national level to -11 million square feet.
“The office market is starting to look healthier, but additional progress will likely hinge on CEO confidence, the employment market and the overall economic outlook,” said Chang.
Finally, the multifamily market has enjoyed 10 quarters of positive absorption, although significant development has overshadowed total demand. Nevertheless, national vacancy rates have fallen for five straight quarters, and the absorption of nearly 800,000 units over the past year is the strongest 12-month demand cycle on record, according to Chang. In the second quarter of 2025, all 43 major markets had positive unit demand.
The next couple of quarters will likely be choppy for all property types, said Chang. But if trade policies stabilize and a recession is averted, as most economists predict, slow but steady economic growth should invigorate space demand for all types of commercial real estate while construction remains muted. That trend would drive positive CRE fundamentals in most markets, he said.
Source: “Economic Uncertainty Weighs on Retail, Industrial Demand”
